Tips for Tackling Your Student Loan Amortization Schedule

Gerard AnthonyMay 24th, 2017

Of all the things you learn in college, one of the most important concepts may be taught outside the classroom when you get a student loan. This concept is amortization, and your understanding of it may affect how much your student loans cost you in the long run, plus how much you pay for future borrowing, like mortgages and car loans.

A student loan amortization schedule is basically a roadmap for paying off your loan. Unlike a roadmap, though, the distances on it are not necessarily fixed – depending on what you do, you can shorten the road towards repayment, or lengthen it.

What is Amortization and How Does It Work?

So what is this important concept of amortization? Amortization is a projection of how a loan will be paid off over time. This projection demonstrates your monthly payments, the rate at which your loan will be paid off, and how much interest you will pay in the long run.

The fact that loans charge interest makes this process more complicated than it might seem. For example, if you borrowed $100 without interest, you can figure out without much thought that it would take 10 payments of $10 apiece to pay it back. However, if interest is charged, by the time you make your first payment you will owe some interest on top of the amount you first borrowed, and then you will continue to be charged interest on the remaining amount you owe even once you start making payments. As a result, paying the loan back in 10 payments will require those payments to be greater than $10 each.

Loan payments are broken down into principal and interest. The principal portion goes towards paying back the amount you originally borrowed, while the interest portion pays the interest that has built up since your last payment. When you take out a loan, you should receive an amortization schedule which will look something like this:

Student Loan Amortization Schedule

Month

Payment

Principal

Interest Paid

Total Interest

Balance

1

$101.25

$67.92

$33.33

$33.33

$9,932.08

The amortization schedule will have a line like this for each month of your loan’s repayment period. The example here was based on a $10,000 loan at 4 percent with a 10-year repayment period. Notice how the amortization schedule shows how the total payment breaks down between principal and interest, and how the ending balance is reduced by the amount of principal paid.

How Does Amortization Affect Your Student Loan Payments?

The speed at which you amortize your loan, otherwise known as the amortization rate, affects how much you will pay in the long run. Notice in the example above that the balance is only reduced by the amount of principal you pay. The longer you take to pay back your loan, the smaller the monthly principal payments will be. Because the following month’s interest would be based on the new balance, a longer repayment period results in paying more interest over the life of the loan.

The fact that your loan balance is affected only by the amount of principal paid has a big impact on your student loan amortization. In the example shown above, the student might be surprised to find out that after a payment of $101.25, the loan balance has only been reduced by $67.92. The rest of the monthly payment went towards interest, which is why student loans often take longer to pay off than people expect. Also, if you don’t pay at least enough to cover the interest that has accrued, the amount you owe will actually increase. This is known as negative amortization – or in more simple terms, going backwards!

Understanding Your Student Loan Amortization Schedule

The relationship between principal and interest is a key to understanding your student loan amortization schedule. A good way to illustrate that relationship is to show how an amortization schedule changes as the loan is repaid. Using the same loan example as above, here are the amortization schedules for the first and last months of that loan:

Student Loan Amortization Schedule (First Month vs. Final Month)

Month

Payment

Principal

Interest Paid

Total Interest

Balance

1

$101.25

$67.92

$33.33

$33.33

$9,932.08

120

$101.25

$100.92

$0.33

$2,149.28

$0.00

Two key things to notice in the difference between the first and last months of this loan amortization schedule. The first is that while the monthly payments are the same, in the first month only $67.92 goes to pay down the balance of the loan. By the last month of the loan, $100.92 of that payment goes toward paying down the balance. This is because as the balance is steadily reduced over time, less interest accrues on it. This means more of the monthly payment can go towards principal rather than interest. As a result of which, in a typical amortization schedule principal is paid down somewhat slowly at first, but then accelerates over the life of the loan.

The second important thing to notice is that by the final month, this student will have paid a total of $2,149.28 in interest. So, despite borrowing only $10,000, the student will end up paying a total of $12,149.28. This amount would be even greater if the amortization were slowed down by delaying making payments or making smaller payments, because that would mean the principal balance on which interest is charged would decline more gradually. So, a key to reducing your total loan cost is to speed up, rather than slow down, your amortization schedule.

Steps to Speed Up Your Student Loan Amortization Schedule

Here are some steps you can take to speed up your student loan amortization schedule or otherwise reduce your interest expense:

1. If possible, make interest payments while still in college

Student loans commonly have a grace period, which allows you to defer repayment until some time after graduation. That may be helpful, but it also costs you more money because your loan will be accruing interest all the while. Ultimately, this extra interest will be added to the amount you owe, and this, in turn, will increase the principal amount on which future interest payments are based. So, if possible, try to pay at least enough to cover the interest portion of your payments while you are still in college, so you will not graduate owing more than you originally borrowed.

2. Make all scheduled payments on time

Once the schedule requires that you start making payments, be diligent about making these payments on time and in full. Failing to do so will add to the interest you accrue in the long run by causing you to pay down principal more slowly, adding missed interest payments to the amount you owe, and possibly incurring penalties which will also add to what you owe.

3. Make extra payments when you can.

Your schedule of payments merely represents the minimum you are required to pay, but keep in mind that you can pay more at times when you happen to have some extra cash. Making extra payments accelerates your amortization schedule, meaning that you will pay principal down more quickly and thus reduce the amount of interest that accrues on that principal.

4. Target your highest interest loans for repayment first

If you graduate with multiple loans, some may have higher interest rates than others. Should you find yourself in a position to make extra payments, specify that you want the extra amounts to go to the loans with the highest interest rates. The faster you pay down principal on those high-interest loans, the less their loan balances will accrue interest at the higher rates.

5. Be alert to refinancing opportunities

If you have loans with relatively high interest rates, you may get an opportunity to reduce those rates by refinancing into a lower-rate loan. Comparing amortization schedules can help you see how both your monthly payment and long-term interest expense might be impacted by refinancing. In doing so, just make sure that any fees involved in refinancing do not wipe out the benefit of reducing your interest rate.